One-Part Markets for Electric Power: Ensuring the Benefits of Competition

  • Frank C. Graves
  • E. Grant Read
  • Philip Q. Hanser
  • Robert L. Earle
Part of the The Springer International Series in Engineering and Computer Science book series (PEPS)


In order to ensure adequacy of generation supply, the utility industry has traditionally been required to carry two to three years of planning reserves, e.g., 20 percent over projected peak demand. Closely related, they have often used two-part (capacity/energy) pricing to buy and sell generation (real power) output. This paper argues that continued use of this approach, especially continuing to require planning reserves under power pool or NERC or other mandate, will undermine the benefits of power industry restructuring. In contrast, a market with no administered capacity requirement, but a one-part commodity price reflecting both marginal operating costs and capacity scarcity, will have many benefits. In particular, it will induce efficient capacity planning—which has been the real problem in the past (not inefficient dispatch) and which is where the real opportunities for future efficiency gains lie. It will also encourage demand-side participation in peaking “reserves”, and forward contracting for risk protection and expansion financing, both of which also reduce generation market power. Independent system operator (ISO) planners and regulatory agencies should concentrate more attention on encouraging demand-side participation and forward contracting, and less on the sufficiency of physical reserves or on customer protection against possible high market prices.


Market Power Spot Market Spot Prex Independent System Operator Forward Market 
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Copyright information

© Springer Science+Business Media New York 1998

Authors and Affiliations

  • Frank C. Graves
    • 1
  • E. Grant Read
    • 2
  • Philip Q. Hanser
    • 1
  • Robert L. Earle
    • 3
  1. 1.The Brattle GroupCambridgeUSA
  2. 2.Canterbury UniversityChristchurchNew Zealand
  3. 3.The Brattle GroupUSA

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